Connecting your strategy with daily operations



It is equally important to sell what you can produce, as it is to produce what you sell. Too much capacity is expensive, and too little could push your customers towards your competitors…

This article will look at how Integrated Business Planning (IBP) can improve your business and provide 3 specific considerations why this should be on business leaders agenda. We will again take this journey through the eyes of our fictional alter ego Celena Noch. For those of you who have not yet made her acquaintance, she is a fictional representation of our combined experiences, with flavor from some of the real-life supply chain hero’s and their struggles we have encountered over the years. So, without further ado, we’ll leave the floor to Celena…

Sorry I’m late, my last meeting ran over - Celena said as she rushed into her office, one hand precariously balancing a cup of steaming hot coffee on top of an open laptop, briefcase in the other. The comment was directed at the company’s Head of Operations, currently occupying one of the two normally empty chairs facing her desk. No worries he said, catching Celena’s cup mid-wobble, gently placing it on her desk without spilling a drop. Celena gave him a grateful nod whilst sitting down, saying – So, what was it you wanted to kick around?

Nothing urgent he repliedI just need someone to bounce ideas with… I can’t wrap my head around why we can’t get the results we want to see from our Lean initiative. We are doing all the right things, but the P&L impact just isn’t there

Yes, Lean can be tricky Celena though to herself. To fully reap its benefits, you need to create an environment in which Lean thrives, namely stability and linearity. Celena was just about to share her thoughts on the matter when her office door burst open. In strode the Head of Sales, anger protruding from his face. Here you are - he said accusingly. Shifting his gaze between the two he continued – Why can’t I have my products in time?

Celena slowly stood up, gestured to the one remaining empty chair, and said - Why don’t you sit down, relax, and start over. What products and when? Slightly taken aback by such a reasonable response to his dramatic entrance, the Head of Sales slowly moved towards the chair and sat down.

Well - he said in a much calmer voice - now that we are all relaxed perhaps you two can explain why I’ve just been told I cannot get any of my new orders of flux capacitators shipped in time. We have already promised the customer! The Head of Operations exchanged a quick glance with Celena before answering - it depends on what you mean by in time… our next available capacity to produce new orders is in 12 weeks due to our current exceptionally long order backlog. If you promised delivery before that we’ll definitely be late. You should not promise something we can’t deliver!

The head of Sales looked crestfallen – 12 weeks, impossible! Our customers will never accept that. It’s far beyond their supply window. We have always promised delivery within 6 weeks. We should be able to do this - your monthly report tells me we are only running production at 70% capacity.

The Head of Operations (slightly impressed he had bothered to look at the capacity report in the first place) breathed heavily before answering: Yes – if you look at the full plant capacity. However, we can only produce these items on line 1 which will be running at close to 100% capacity for the coming 11 weeks. Look! He pulled out his laptop and opened the latest report (figure 1).

Figure 1. Example overview of Plant and Line capacity utilization


The Head of Sales examined the report carefully. Ha, he said, why haven’t you increased capacity on line 1 then? I can clearly see we are far below max capacity. Do it now!

Closing his computer, the Head of Operations leaned back in his chair before responding - It is not that easy. This is a complex product. It takes us 3-6 months to find and train people to open another shift. I’ve been asking your team for weeks if this demand will continue, making it worthwhile to invest in more capacity. But so far, I have not heard anything back. Right now, we are forced to re-plan production on an almost daily basis to keep up with your promises to whatever customer is most prioritized today...

What are you saying, this should not have come as a surprise, the Head of Sales exploded. You had our sales forecast. It clearly shows we were expecting an increase in sales over the period.

Yes, the Head of Operations agreed, but we all know it is often made to reflect your budget rather than actual demand. Also, it only shows me the value of your total expected sales. It does not help me at all. I need to understand what products and unbiased volumes you’re talking about, in order to know if or what capacity to expand. I can’t plan for and produce value; I plan for and produce products!

The ensuing silence of the room was palpable, until finally broken by the Head of Sales – Are you crazy? Do you expect me to tell you what products we will sell 3-6 months from now? No one can do that. We have thousands of different configurations!

You don’t have to, Celena said in a firm voice. Both functional Heads turned their attention towards her, wondering what she meant. You don’t have to, she repeated, at this planning horizon it is enough if you could estimate volumes by capacity group. Looking at historical sales should give you a good starting point. Much of the individual product variability will even out when consolidated. You could then manually adjust for any customer or market intelligence you have. The important thing is it should come from Sales because you are closest to the customer.

Head of Sales, not ready to give up the anger he had invested so much in yet, rolled his eyes before blurting out – We don’t have time to forecast. We need to focus on the customers and selling!

Celena looked at him sternly before responding – Yes but selling something we can’t deliver isn’t very customer centric, is it? We want to make sure we can keep our promises. In my experience, customers prefer a later agreed shipment date they can rely on, to an earlier promised date where we don’t deliver on time. If you want us to move faster and manage larger volumes, you need to help us understand what future demand will look like – in time for us to react. We all know our current customer service level performance leaves a lot to be desired.

Head of Operations nodded approvingly but stopped when noticing Celena’s stern look was now focused on him: And you, the reason you can’t get your Lean initiative to work is because you’re allowing yourself to be reactive. The firm- and limited planning zones are there for a reason. If you keep changing production plans on a whim, you’ll have the opposite of a Lean effect, with broken production sequences and a series of consequential inefficiencies. Also, you shouldn’t have passively waited for an updated sales forecast but put your foot down much earlier – months ago! The functional Heads sat quiet for a while, before sheepishly acknowledging the truth in Celena’s words: but what can we do differently?

Celena took a deep breath before speaking - both your issues stem from the same problem. We do not have sufficient visibility of upcoming demand, nor a cross functional decision-making process where we can align on demand and supply issues within all relevant planning horizons. We need to give ourselves sufficient time to react and adapt gradually, without being reactive, and only promise what we can deliver. This is where Integrated Business Planning (IBP) comes to play.

The Head of Sales was first to speak – nothing is that easy. And how is this different from all other management buzz words that do nothing but bring more administrative work for us, he asked suspiciously. Celena shook her head. I never said it was easy. It’s hard work. But it pays off - properly applied, IBP would help us improve our customer service level and delivery lead times, reduce inventory levels, stabilize production, and build strong cross-functional teams.

Celena paused to let her comments sink in. After a moment of silence, she continued with a softer voice – give me a day to gather my thoughts and put together a brief on IBP for you. We can pick up the discussion from there and agree next steps. Now off you go and sort out the most urgent deliveries!

She watched as the two functional Heads left the room. If only I could solve murders as easily, she mused whilst thinking back to the 2 dead bodies she recently discovered hidden in broom cupboards. On 2 different occasions (see ‘How I learned to stop worrying and love my Supply Chain’ for reference). Shaking her head, she eventually took out pen and paper and got to work…


Celena’s 3 considerations on IBP

1. You only have the Capacity you plan for – so plan it right

Integrated Business Planning connects strategy to execution, allowing companies to adapt and allocate its resources to its most rewarding areas, meeting customer demand in the most efficient and profitable way.

Why is this important? An imbalance in supply and demand is often bad for business. Too much supply means an over-dimensioned cost base and lower overhead absorption, with inefficient production runs, growing inventories and deteriorating morale from ensuing layoffs. On the other hand, too little supply leads to growing order backlogs and suffering customer delivery performance, increasing costs from overtime and overnight shipments, quality issues (struggling to catch up) and ultimately lost sales.

Can an imbalance in supply and demand ever be good? Yes, in cases where the projected excess demand is identified and lies well enough into the future, giving the company sufficient time to economically increase its capacity before that, it’s fine!

So how do you align your capacity with your demand? Executive Sales and Operations Planning (a key feature of IBP) help do just that. Properly applied:

  • it bridges long term strategic decision with daily operations through formalized and interdependent decision forums and feedback loops;

  • it aligns capacity with market demand (and facilitates informed tradeoffs across functions when plans cannot be reconciled) - through cross-functional collaborative consensus planning and preparatory alignment meetings; and

  • it balances intra-divisional targets towards common goals, regarding sales, profitability, productivity, service levels and (trade) working capital.

2. Set yourself up for success – let your forecast be your window into the future

Producing industries perform best in a stable and linear environment. Unfortunately, this is not how usual demand behaves. Toyota, the embodiment of Lean, solves this by having its internal dealers absorb demand variability through substantial retail and distribution finished-goods inventories, into which production can push its assembled products.

Most companies cannot afford the luxury of maintaining large finished-goods inventories to insulate production from fluctuating demand - but must find alternative ways to reduce the effects of demand variability. This is where forecasting plays an important role – allowing for timely and efficient resource adaptation and allocation.

In many companies, the biggest barrier to implementing Integrated Business Planning (or Sales and Operations Planning for that matter) is an aversion towards forecasting. Ironically enough, most of these companies have some form of forecasting already in place. The problem is often who delivers it, the quality of information, at what planning horizon it reflects, and at what level.

So, what should a forecast look like, and who should do it?

  • First of all, all businesses can be forecasted. It will never be 100% accurate, nor does it have to be. Sales should own and deliver the forecast, simply because they are closest to the market and customers.

  • A Sales forecast should be unbiased and reflect true demand. It should also be aggregated into one demand plan, in a format and language relevant and understood by those using it (volume, not value) covering the relevant planning horizon.

  • Different planning horizons require different levels of granularity. The shorter the horizon, the higher the level of granularity. IBP and S&OP forecasts are usually at a family or capacity group level (see figure 2). These categories should not be defined by commercial aspects alone, but rather linked to how and where the related products can be sourced or produced.

  • An IBP and S&OP forecast horizon should cover the time it takes to make decisions and sustainably and economically adapt and align resources and capacity to future demand - maintaining service level, margin, production rates and quality.

  • Make sure to apply 21st century technology to today’s supply chain challenges. Even though systems alone won’t make your IBP excel (but people), there are advanced AI and machine learning demand and supply planning decision support tools that help automate processes and improve your forecast accuracy and plan, as well as simulate outcomes.

Figure 2. SETPOINT Advisory | IBP and S&OP’s role in overall planning structure – aligning strategy with daily operations

3. Break your silos – true improvement comes from holistic & cross-functional collaboration

Companies often mistake IBP (or S&OP for that matter) for an operational concern, sometimes - if at all - involving Sales. This could not be more wrong.

Properly applied, IBP (and S&OP) links Demand Planning (Sales and Marketing), Supply Planning (Purchasing and Production), Portfolio Planning (Product Management and R&D) and Financial Planning (Finance) – aligning strategic direction and financial targets with operational decisions and execution across the entire business.

A company is never better than the sum of its functions. All parts of any production or service solution are interconnected and mutually dependent in generating one common successful outcome. This cross-functional end-to-end alignment can be challenging to achieve, as it involves multiple stakeholders with often conflicting agendas, targets and KPIs. These conflicts are not only prevalent in a company’s relationship with its external stakeholders, but internally as well.

IBP (and S&OP) help bridge these differences, focusing beyond pure divisional excellence (where individual optimization often takes place at the expense of the supply chain as a whole) towards one greater common goal.

Six success factors for achieving a cross functional and holistic IBP include:

  • Focus on the business as a whole. Align targets and incentives across the organization. Focus less on optimizing individual functions or divisions but set targets through the lens of the company as a whole.

  • Know and communicate your SETPOINT. Be as good as you can be. However, you cannot be better than your current resources and constraints allow, unless structural change takes place. Make sure target setting is aligned with your current abilities or ability to improve.

  • Create shared visibility through common dashboards. Be fact-based and data driven to avoid subjective interpretations and supply chain bias. Use targeted KPIs to focus efforts where it matters most (don’t drown your people in KPIs – you can’t measure everything).

  • Don’t forget the people. Even though Executives should own the IBP and S&OP process, overall behavior is key to driving sustainable change, and behavior comes from individual understanding and motivation to comply. Ensure your full team’s buy-in through clear responsibilities, end-to-end process visualization and IBP trainings.

  • Be steadfast in your approach. IBP takes discipline and joint responsibilities. Maintain meeting structures. Be true to decisions. Approved consensus plans should prioritize business that forward the organizations strategic and financial goals. No more sacred cows!

  • Continuously change for the better. IBP is not a one-off magic bullet that fixes all your problems in one go. Approach it as an ongoing process that needs to be continuously reviewed and revised, involving all stakeholders to avoid local sub optimization.

Celena leaned back and reviewed her work. Satisfied she saved the document and closed her computer. This should do it, she thought as she took a sip of what was now lukewarm coffee. If this does not spark an interest, I don’t know what will.

She diverted her energy to the other issue at hand: the piling body count (see earlier Celena-articles for reference). She had instantaneously identified the second body as the by now former warehouse manager. Who was killing off her team? And why? Would there be more dead bodies to come? She had to get to the bottom of this…

With those words we leave Celena to contemplate her next steps.


Are you interested in learning more about how IBP could benefit your organization?

SETPOINT Group is a recognized authority in the specialized field of Lean Working Capital, including supply chain control, where IBP and S&OP plays an integral role. We have decades of experience in helping our clients design and implement successful IBP and S&OP processes that are tailored to their specific requirements and needs, dependent on organizational and supply chain set-up, existing structures as well as maturity level.

We know what good looks like and can help you navigate towards your optimal solution, whilst also engaging key stake holders to ensure buy-in, commitment and behavioral change - driving towards lasting results in line with financial plans and strategic direction.


Visit our webpage or contact us to learn more!


www.setpointgroup.se

alexander@setpointgroup.se

johan@setpointgroup.se

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